By Michael Farrar, V.P. Colliers International | JUNE 25, 2014

Greater Phoenix office market update

The Greater Phoenix office market is on a bit of an upswing, with vacancies trending lower, rents inching higher and businesses adding workers. The market still faces challenges, chief among them a vacancy rate that remains among the highest of the major metro areas in the country, but conditions are heading in a positive direction.

Office vacancy dipped below 20 percent in Greater Phoenix in the third quarter of last year, ending a streak of 17 consecutive quarters where the rate ranged from 20-23 percent. Vacancy initially topped 20 percent because of a supply/demand imbalance; tenant demand was retreating in response to the housing bust and the recession, while projects started before the onset of the recession delivered with few—if any—tenants in place. In recent years, those trends have reversed. Since 2012, net absorption has outpaced construction at a pace of nearly 5 to 1, with tenants moving into a net of more than 5 million square feet. A few new projects are under construction including single-tenant projects for State Farm in Tempe, and build-to-suits for Go Daddy and GM. The 264,000-square foot third phase of the Hayden Ferry Lakeside project broke ground in 2014 and is one of the most prominent multi-tenant projects currently under way.

Average asking rents in Greater Phoenix have turned positive, increasing in each of the past five quarters after an extended run of quarterly dips. Rents in Greater Phoenix reached $20.61 per square foot, up 4.9 percent year over year. Asking rents peaked at year-end 2007 at $25.78 per square foot, approximately 25 percent above today’s rates.

Sales activity for office buildings dipped 35 percent from the end of last year to the first quarter 2014. Despite the decline from the end of last year, sales velocity in the first quarter 2014 was up more than 50 percent compared to the first quarter of last year. Sales activity in the past 12 months has increased by 13 percent compared to year-earlier levels.

Pricing continues to trend higher as the local office market strengthens. After rising 12 percent from 2012 to 2013, the median price advanced 24 percent in the first quarter to $108 per square foot. In the first quarter, 27 percent of all sales closed above $150 per square foot, up from 21 percent in 2013. Cap rates for office properties are averaging in the low- to mid-7 percent range. Rates trended lower in 2012 and 2013 but have remained largely unchanged year to date. Office vacancy is slowing improving and average asking rents have increased in each of the past four quarters, fueling optimism about the ability to impose additional rent increases in the coming quarters.